Many people get prompted to trade in commodities as it presents chances of large profits in shorter periods of time. However, trading in commodities is associated with high risk and not a cup of tea for casual investors. Commodities are simply raw materials like wheat, oranges, oil and gold, necessarily required for producing finished products but their trading is far from simple. Here are few tips for investors interested in learning how do you trade commodities.
- Comprehend a commodity futures contract. Remember, commodity trading means buying and selling of contracts to book profits from rising and falling prices in market. For example, a farmer may sign a contract guaranteeing him the present market prices when it’s time to sell his crop and thus lower his risk as it is too difficult to guess the price well in advance.
- Understand the connected risks. Commodity trading is mostly done on margin money, meaning you make a small deposit which is a small percentage of the total price. Slight increase in prices can mean a lot of money for you but you may lose heavily by a marginal drop of say 10% in the price a commodity.
- You can start the process of learning to trade in commodities by studying on the subject. A lot of literature is available online as well offline. Successful trading requires both, practice and study.
- You should learn to get acquainted with sources of information. Keeping a constant watch on ongoing market trends is crucial. Scan the newspapers and other online or published magazines to keep you informed of developments. For being successful it’s imperative to keep a watch on market trends. Apart from that, you should know how to interpret commodity price charts.
- Focus on only one or two commodities. Market is primarily affected by economic developments and industrial environment. For instance, any change in oil output that OPEC decides can affect the market instantaneously. Likewise, the price of oranges or orange juices could go up if Florida suddenly becomes too cold. For a novice learning how do you trade commodities it is advisable to concentrate on very limited number of commodities and continue tracking those items?
- The next step concerning how to you trade commodities is to before investing your cash. You can find many websites of commodity brokers/ traders that allow you to open dummy account and practice commodity trading before investing any real money. Such sites prove very helpful to test your skills without causing any financial loss.
- For trading in commodities you need open an account with a broker. Some brokers may help you by giving expert advice. Brokerage firms providing ‘full service’ would naturally charge more, but it is worthwhile, especially when you are new to the trade. On gaining adequate experience you may patronize a discount broker and save some money in the process. Opening an online account with a broker is simple; the usual minimum despot is $1,000. You may trade online or ask your broker for a buy order. You can ask the trader to simultaneously place a stop order too that helps reducing your loss in case of an unexpected drop in prices.